The Structure of Financial System of Bangladesh Introduction: Financial system is a system which tones up the savings-investment process of a country.

Financial system plays a significant role in the economic development of a country. Theimportance of an efficient financial sector lies in the fact that, it ensures domestic resourcesmobilization, generation of savings, and investments in productive sectors. In fact, it is thesystem by which a countrys most profitable and efficient projects are systematically andcontinuously directed to the most productive sources of future growth. The financial systemnot only transfers funds from savers to investors, it also selects projects which will yield thehighest returns, accumulates sufficient quantities of capital to fund the range of investmentprojects across economic activities, accounts for price risks across assets, monitor performance,and enforce contracts. According to the McKinnon- Shaw hypothesis (1973), the conventionalwisdom is that flexibility and efficiency of the financial system are crucial to the growth anddevelopment of a market economy. A comprehensive study by King and Levine (1993) fromacross 119 developed and developing countries over the 1960-1989 period provides compellingevidence that economic growth is dramatically dependent on the size of financial sector, creditto private sector and enterprises and interest rates. The larger the financial sector in thecontext of the overall economy, the greater the share of lending by depository rather thancentral banks, and the greater the share of credit to private sector rather than public sector, thegreater is the rate of economic growth. Major Components of a Financial System and their roles: Financial System in Bangladesh Money Market 1.Bangladesh Bank 2.All Banks 3.Non-Bankfinancialinstitutions 4.Money Changers 5.Credit ratingagencies

Capital Market A. Securities Market 1.Securities &ExchangeCommission 2.StockExchanges: DSE,CSE...

S TRUCTURE OF F INANCIAL S YSTEM IN B ANGLADESH 28 0 3 - ( i i ) . S e c o n d a r y M a r k e t Markets in which existing securities are traded; as opposed to aprimary market where securities are sold for the first time. Inmost cases a stock exchange largely fulfils the role of asecondary market, with the flotation of new issues representingonly a small proportion of its total business. However, it is theexistence of a flourishing secondary market,

providing liquidityand the spreading of risk.Means exchange of ownership in the financial markets.Secondary market services inclu ded: Brokerage services Tk Tk

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YSTEM IN B ANGLADESH 29 0 3 - ( i i i ) . M o n e y M a r k e t Monetary policy framework refers to a logical and sequential setof actions that a central bank has to design to conduct monetarypolicy. The central bank wants to achieve certain goals butcannot directly influence the goals. It has a set of tools at itsdisposal that can affect the goals indirectly after long andvariable lags.So, if central bank waits to see the effect of the tools on thegoals it will be too late to make any correction to the policy.That is why it aims at some variables that lie between tools andgoals, which it can influence and monitor very shortly.Thus a central bank decides on the strategy for conductingmonetary policy. The variables that the central bank addressescan be classified as instruments, targets and goals. If theframework is expressed in a flow chart instruments (i.e. tools)and goals are on the two ends and targets are in between. Thetargets are further classified as operational target andintermediate target. The central bank also keeps an eye on someinformation variables to make any policy decision. 0 3 - ( i v ) . C a p i t a l M a r k e t

The capital market in Bangladesh is regulated and supervised by theSecurities and Exchange Commission (SEC) under the SEC Act, 1993. TheSEC so far has issued licenses to 27 non-bank institutions to participate inthe capital market of which 19 institutions are Merchant Banker and PortfolioManager while 7 are Issue Managers and (one) acts as Issue Manager andUnderwriter.The Dhaka Stock Exchange (DSE), which was established as a public limitedcompany in April 1954, and the Chittagong Stock Exchange (CSE),established in April 1995, dealing in the secondary capital market. As of endDecember 2006 the total number of enlisted securities with DSE stood at310 of which 255 are listed companies, 13 mutual funds, 8 debentures and34 treasury bonds after the year 2006 that the total number of institutionsare increasing rapidly.

S TRUCTURE OF F INANCIAL S YSTEM IN B ANGLADESH 30 Recently, two (2)-power sector companies namely Dhaka Electric SupplyCompany (DESCO) and Power Grid Company of Bangladesh (PGCB) havebeen listed in the capital market under the newly introduced direct listingregulation. The Investment Corporation of Bangladesh (ICB) was establishedin 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, providessubstantial bridge financing programs, and maintains investment accounts,floats and manages closed-end and openend mutual funds and closed-endunit funds to ensure supply of securities as well as generating demand forsecurities. ICB also operates in both DSE and CSE as dealer. Some SBs, suchas

Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS),Bangladesh Small Industries and Commerce (BASIC) Bank Ltd. As well asNCBs and some foreign banks are engaged in long-term industrial financing.Capital Market product in Bangladesh: Share: Ordinary Share, Preference Share Mutual Fund Debt Securities Debenture Bond A well-developed tradable bond market is critical to ensuring stability andefficiency of the financial market in Bangladesh. In the country, most of theavailable savings are held by the banks in the form of deposits that arechanneled through lending to the investors.The dominance of banks, with high bad loan portfolios and non-transferability of most of their debt/savings instruments, is a primehindrance to developing a well-performing bond market. The absence of such a market makes the financial market less competitive as it fails togenerate market interest rates that reflect the opportunity cost of funds atdifferent maturities and results in excessive reliance on the banking system